NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2023
(Unaudited)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business: Cousins Properties Incorporated (“Cousins”), a Georgia corporation, is a fully integrated, self-administered, and self-managed real estate investment trust (“REIT”). Cousins conducts substantially all of its business through Cousins Properties LP ("CPLP"). Cousins owns in excess of 99% of CPLP and consolidates CPLP. As of March 31, 2023 and 2022, limited partners owned the remaining 25,000 common units of CPLP. CPLP wholly owns Cousins TRS Services LLC ("CTRS"), a taxable entity which owns and manages its own real estate portfolio and performs certain real estate-related services for other parties.
Cousins, CPLP, CTRS, and their subsidiaries (collectively, the “Company”) develop, acquire, lease, manage, and own primarily Class A office properties and opportunistic mixed-use developments in the Sun Belt markets of the United States with a focus on Atlanta, Austin, Phoenix, Tampa, Charlotte, Dallas, and Nashville. Cousins has elected to be taxed as a REIT and intends to, among other things, distribute at least 100% of its net taxable income to stockholders, thereby eliminating any liability for federal income taxes under current law. Therefore, the results included herein do not include a federal income tax provision for Cousins. As of March 31, 2023, the Company's portfolio of real estate assets consisted of interests in 18.8 million square feet of office space and 310,000 square feet of multi-family space.
Basis of Presentation: The condensed consolidated financial statements are unaudited and were prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, these financial statements reflect all adjustments necessary (which adjustments are of a normal and recurring nature) for the fair presentation of the Company's financial position as of March 31, 2023 and the results of operations for the three months ended March 31, 2023 and 2022. The results of operations for the three months ended March 31, 2023 are not necessarily indicative of results expected for the full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to the rules and regulations of the SEC. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022. The accounting policies employed are substantially the same as those shown in note 2 to the consolidated financial statements included therein.
The Company evaluates all partnerships, joint ventures, and other arrangements with variable interests to determine if the entity or arrangement qualifies as a variable interest entity ("VIE"), as defined in the Financial Accounting Standard Board's ("FASB") Accounting Standards Codification ("ASC"). If the entity or arrangement qualifies as a VIE and the Company is determined to be the primary beneficiary, the Company is required to consolidate the assets, liabilities, and results of operations of the VIE. At March 31, 2023, the Company had no investments or interests in any VIEs.
2. REAL ESTATE
For the three months ended March 31, 2023 and 2022, the Company had no real estate transactions.
The Company tests buildings held for investment, by disposal groups, for impairment whenever changes in circumstances indicate a disposal group’s carrying value may not be recoverable. The test is conducted using undiscounted cash flows for the shorter of the building’s estimated hold period or its remaining useful life. When testing for recoverability of value of buildings held for investment, projected cash flows are used over its expected hold period. If the expected hold period includes some likelihood of shorter-term hold period from a potential sale, the probability of a sale is layered into the analysis. If any building's held-for-investment analysis were to fail the impairment test, its book value would be written down to its then current estimated fair value, before any selling expense, and that building would continue to depreciate over its remaining useful life. None of the Company’s held-for-investment buildings were impaired during any periods presented in the accompanying statement of operations while under the held-for-investment classification.
The Company also reviews held-for-sale buildings, if any, for impairments. If book value is in excess of estimated fair value less estimated selling costs, we impair those assets to fair value less estimated selling costs. There were no held-for-sale buildings during any periods presented in the accompanying statements of operations.
The Company also reviews land and projects under development for impairment whenever changes in circumstances indicate the assets' carrying value may not be recoverable. None of the Company's investments in land or projects under development were impaired during any periods presented in the accompanying statement of operations.
The Company may record impairment charges in future periods if the economy and the office industry weakens, the operating results of individual buildings are materially different from our forecasts, or we shorten our contemplated hold period for any operating buildings.
3. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
The following information summarizes financial data and principal activities of the Company's unconsolidated joint ventures. The information included in the following table entitled summary of financial position is as of March 31, 2023 and December 31, 2022 ($ in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| SUMMARY OF FINANCIAL POSITION |
| Total Assets | | Total Debt | | Total Equity (Deficit) | | Company's Investment | |
| 2023 | | 2022 | | 2023 | | 2022 | | 2023 | | 2022 | | 2023 | | 2022 | |
| Operating Properties: | | | | | | | | | | | | | | | | |
| AMCO 120 WT Holdings, LLC | $ | 80,739 | | | $ | 81,136 | | | $ | — | | | $ | — | | | $ | 79,916 | | | $ | 80,509 | | | $ | 14,713 | | | $ | 14,856 | | |
| Crawford Long - CPI, LLC (1) | 23,111 | | | 22,857 | | | 62,406 | | | 62,856 | | | (40,697) | | | (39,691) | | | (19,697) | | (2) | (19,173) | | (2) |
| Under Development: | | | | | | | | | | | | | | | | |
| Neuhoff Holdings LLC (3) | 391,658 | | | 321,338 | | | 129,622 | | | 115,940 | | | 222,390 | | | 177,734 | | | 117,618 | | | 93,647 | | |
| Land: | | | | | | | | | | | | | | | | |
| 715 Ponce Holdings LLC | 8,391 | | | 8,333 | | | — | | | — | | | 8,377 | | | 8,332 | | | 4,311 | | | 4,261 | | |
| Sold and Other: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| HICO Victory Center LP | 158 | | | 158 | | | — | | | — | | | 5,818 | | | 5,818 | | | 79 | | | 75 | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| $ | 504,057 | | | $ | 433,822 | | | $ | 192,028 | | | $ | 178,796 | | | $ | 275,804 | | | $ | 232,702 | | | $ | 117,024 | | | $ | 93,666 | | |
(1) Subsequent to quarter end, Crawford Long - CPI, LLC executed a loan application for its Medical Offices at Emory Hospital property. This $83.0 million interest-only mortgage loan will have a 9-year term and a fixed interest rate of 4.80%. It is expected to close in the second quarter, with the proceeds to be used to pay off the existing $62.4 million mortgage loan maturing June 1, 2023.
(2) Negative investment basis included in deferred income on the consolidated balance sheets.
(3) Neuhoff Holdings LLC has a construction loan with a borrowing capacity up to $312.7 million that matures September 2025. Effective April 10, 2023, the interest rate on the Neuhoff loan changed from the London Interbank Offered Rate ("LIBOR") to the Secured Overnight Financing Rate ("SOFR") plus 3.45%. The minimum rate is 3.60%.
The information included in the summary of operations table is for the three months ended March 31, 2023 and 2022 ($ in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| SUMMARY OF OPERATIONS |
| Total Revenues | | Net Income (Loss) | | Company's Income
from Investment |
| 2023 | | 2022 | | | | 2023 | | 2022 | | | | 2023 | | 2022 | | |
| Operating Properties: | | | | | | | | | | | | | | | | | |
| AMCO 120 WT Holdings, LLC | $ | 2,701 | | | $ | 2,565 | | | | | $ | 780 | | | $ | 692 | | | | | $ | 155 | | | $ | 134 | | | |
| Crawford Long - CPI, LLC | 3,079 | | | 3,178 | | | | | 994 | | | 1,116 | | | | | 462 | | | 523 | | | |
| Under Development: | | | | | | | | | | | | | | | | | |
| Neuhoff Holdings LLC | 24 | | | 25 | | | | | 10 | | | 21 | | | | | 5 | | | 10 | | | |
| Land: | | | | | | | | | | | | | | | | | |
| 715 Ponce Holdings LLC | 67 | | | 55 | | | | | 45 | | | 36 | | | | | 23 | | | 18 | | | |
| Sold and Other: | | | | | | | | | | | | | | | | | |
| Carolina Square Holdings LP | — | | | 4,089 | | | | | 48 | | | 724 | | | | | 24 | | | 334 | | | |
| HICO Victory Center LP | 92 | | | 19 | | | | | 6,735 | | | 19 | | | | | 4 | | | 6 | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Other | — | | | (2) | | | | | — | | | (41) | | | | | — | | | 99 | | | |
| $ | 5,963 | | | $ | 9,929 | | | | | $ | 8,612 | | | $ | 2,567 | | | | | $ | 673 | | | $ | 1,124 | | | |
4. INTANGIBLE ASSETS AND LIABILITIES
At March 31, 2023 and December 31, 2022, intangible assets included the following ($ in thousands):
| | | | | | | | | | | | | | |
| | 2023 | | 2022 |
In-place leases, net of accumulated amortization of $130,667 and $131,021 in 2023 and 2022, respectively | | $ | 96,668 | | | $ | 102,080 | |
Below-market ground leases, net of accumulated amortization of $1,960 and $1,860 in 2023 and 2022, respectively | | 17,293 | | | 17,393 | |
Above-market leases, net of accumulated amortization of $24,624 and $25,085 in 2023 and 2022, respectively | | 14,203 | | | 15,093 | |
| Goodwill | | 1,674 | | | 1,674 | |
| | $ | 129,838 | | | $ | 136,240 | |
At March 31, 2023 and December 31, 2022, intangible liabilities included the following ($ in thousands):
| | | | | | | | | | | | | | |
| | 2023 | | 2022 |
Below-market leases, net of accumulated amortization of $49,506 and $48,994 in 2023 and 2022, respectively | | $ | 49,831 | | | $ | 52,280 | |
| | | | |
| | | | |
Aggregate net amortization expense related to intangible assets and liabilities for the three months ended March 31, 2023 and 2022 was $3.9 million and $5.6 million, respectively. Over the next five years and thereafter, aggregate amortization of these intangible assets and liabilities is anticipated to be as follows ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| In-Place
Leases | | Below-Market Ground Leases | | Above-Market Leases | | Below-Market
Leases | | |
| 2023 (nine months) | $ | 15,428 | | | $ | 300 | | | $ | 2,414 | | | $ | (7,006) | | | |
| 2024 | 18,301 | | | 400 | | | 2,673 | | | (8,739) | | | |
| 2025 | 15,324 | | | 400 | | | 2,106 | | | (7,956) | | | |
| 2026 | 12,275 | | | 400 | | | 1,673 | | | (6,506) | | | |
| 2027 | 9,684 | | | 400 | | | 1,252 | | | (4,973) | | | |
| Thereafter | 25,656 | | | 15,393 | | | 4,085 | | | (14,651) | | | |
| $ | 96,668 | | | $ | 17,293 | | | $ | 14,203 | | | $ | (49,831) | | | |
5. OTHER ASSETS
Other assets on the consolidated balance sheets as of March 31, 2023 and December 31, 2022 included the following ($ in thousands):
| | | | | | | | | | | | | | |
| | 2023 | | 2022 |
| | | | |
| Predevelopment costs | | $ | 51,556 | | | $ | 50,009 | |
| Prepaid expenses and other assets | | 11,781 | | | 6,438 | |
Furniture, fixtures and equipment and other deferred costs, net of accumulated depreciation of $18,412 and $18,860 in 2023 and 2022, respectively | | 11,467 | | | 11,824 | |
Lease inducements, net of accumulated amortization of $5,615 and $5,129 in 2023 and 2022, respectively | | 8,014 | | | 8,091 | |
Credit Facility deferred financing costs, net of accumulated amortization of $1,167 and $135 in 2023 and 2022, respectively | | 5,239 | | | 5,550 | |
| | $ | 88,057 | | | $ | 81,912 | |
Predevelopment costs represent amounts that are capitalized related to predevelopment projects that the Company determined are probable of future development.
Lease inducements are incentives paid to tenants in conjunction with leasing space, such as moving costs, sublease arrangements of prior space, and other costs. These amounts are amortized into rental revenues over the individual underlying lease terms.
6. NOTES PAYABLE
The following table summarizes the terms of notes payable outstanding at March 31, 2023 and December 31, 2022 ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Description | | Interest Rate (1) | | Maturity (2) | | 2023 | | 2022 |
| Unsecured Notes: | | | | | | | | |
| Credit Facility | | 5.80% | | April 2027 | | $ | 172,300 | | | $ | 56,600 | |
| Term Loan | | 5.95% | | March 2025 | | 400,000 | | | 400,000 | |
| Term Loan | | 5.38% | | August 2024 | | 350,000 | | | 350,000 | |
| Senior Note | | 3.95% | | July 2029 | | 275,000 | | | 275,000 | |
| Senior Note | | 3.91% | | July 2025 | | 250,000 | | | 250,000 | |
| Senior Note | | 3.86% | | July 2028 | | 250,000 | | | 250,000 | |
| Senior Note | | 3.78% | | July 2027 | | 125,000 | | | 125,000 | |
| Senior Note | | 4.09% | | July 2027 | | 100,000 | | | 100,000 | |
| | | | | | 1,922,300 | | | 1,806,600 | |
| Secured Mortgage Notes: | | | | | | | | |
| Terminus (3) | | 6.34% | | January 2031 | | 221,000 | | | 221,000 | |
| Fifth Third Center | | 3.37% | | October 2026 | | 129,276 | | | 130,168 | |
| Colorado Tower | | 3.45% | | September 2026 | | 108,888 | | | 109,552 | |
| | | | | | | | |
| Domain 10 | | 3.75% | | November 2024 | | 74,037 | | | 74,521 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | 533,201 | | | 535,241 | |
| | | | | | | $ | 2,455,501 | | | $ | 2,341,841 | |
| | | | | | | | |
| | | | | | | | |
| Unamortized loan costs | | | | | | (6,559) | | | (7,235) | |
| Total Notes Payable | | | | | | $ | 2,448,942 | | | $ | 2,334,606 | |
(1) Interest rate as of March 31, 2023.
(2) Weighted average maturity of notes payable outstanding at March 31, 2023 was 3.8 years.
(3) Represents $123.0 million and $98.0 million non-cross-collateralized mortgages secured by the Terminus 100 and Terminus 200 buildings, respectively.
Credit Facility
On May 2, 2022, the Company entered into a Fifth Amended and Restated Credit Agreement (the "Credit Facility") under which the Company may borrow up to $1 billion if certain conditions are satisfied. The Credit Facility recasts the prior facility by, among other things, extending the maturity date from January 3, 2023, to April 30, 2027, and reducing certain per annum variable interest rate spreads and other fees. The Credit Facility contains financial covenants that require, among other things, the maintenance of unencumbered interest coverage ratio of at least 1.75x; a fixed charge coverage ratio of at least 1.50x; a secured leverage ratio of no more than 50%; and an overall leverage ratio of no more than 60%.
The interest rate applicable to the Credit Facility varies according to the Company's leverage ratio and may, at the election of the Company, be determined based on either (1) the Daily SOFR or Term SOFR, plus a SOFR adjustment of 0.10% ("Adjusted SOFR") and a spread of between 0.90% and 1.40%, or (2) the greater of (i) Bank of America's prime rate, (ii) the federal funds rate plus 0.50%, (iii) Term SOFR, plus a SOFR adjustment of 0.10% and 1.00%, or (iv) 1.00%, plus a spread of between 0.00% and 0.40%, based on leverage. In addition to the interest rate, the Credit Facility is also subject to a facility fee of 0.15% to 0.30%, depending on leverage, on the entire $1 billion capacity.
At March 31, 2023, the Credit Facility's interest rate spread over Adjusted SOFR was 0.90% and the facility fee spread was 0.15%. The amount that the Company may draw under the Credit Facility is a defined calculation based on the Company's unencumbered assets and other factors. The total available borrowing capacity under the Credit Facility was $827.7 million at March 31, 2023. The amounts outstanding under the Credit Facility may be accelerated upon the occurrence of any events of default.
The Credit Facility replaced a $1 billion prior facility that was set to expire in January 2023. The rate paid under the prior facility from January 1, 2022 through May 1, 2022 was LIBOR plus 1.05%.
Term Loans
On October 3, 2022, the Company entered into a Delayed Draw Term Loan Agreement (the "2022 Term Loan") and borrowed the full $400 million available under the loan. The loan matures on March 3, 2025 with four consecutive options to extend the maturity date for an additional six months. The interest rate provisions are the same as the 2021 Term Loan, and the covenants are the same as the Credit Facility. Subsequent to quarter end, the Company entered into a floating-to-fixed rate swap with respect to $200 million of the $400 million 2022 Term Loan effective April 19, 2023 through the maturity date of March 3, 2025. This swap fixed the underlying SOFR rate at 4.298%.
On June 28, 2021, the Company entered into an Amended and Restated Term Loan Agreement (the "2021 Term Loan") that amended the former term loan agreement. Under the 2021 Term Loan, the Company has borrowed $350 million that matures on August 30, 2024 with four consecutive options to extend the maturity date for an additional 180 days. On September 19, 2022, the Company entered into the First Amendment to the 2021 Term Loan. This amendment aligns covenants and available interest rates, including the addition of SOFR, to that of the Credit Facility. Under the terms of this First Amendment the interest rate applicable to the 2021 Term Loan varies according to the Company's leverage ratio and may, at the election of the Company, be determined based on either (1) the Daily SOFR or Term SOFR, plus a SOFR adjustment of 0.10% ("Adjusted SOFR") and a spread of between 1.05% and 1.65%, or (2) the greater of (i) Bank of America's prime rate, (ii) the federal funds rate plus 0.50%, (iii) Term SOFR, plus a SOFR adjustment of 0.10% and 1.00%, (iv) or 1.00%, plus a spread of between 0.05% and 0.65%, based on leverage. On September 19, 2022, the Company provided notice of our election of the Daily SOFR Rate Loan provisions.
On September 27, 2022, the Company entered into a floating-to-fixed interest rate swap with respect to the $350 million 2021 Term Loan through the maturity date of August 30, 2024. This swap effectively fixed the underlying SOFR rate at 4.234%. Please see note 7 for more information on this cash flow hedge.
At March 31, 2023, the 2021 and 2022 Term Loan's spread over Adjusted SOFR rate was 1.05%.
Unsecured Senior Notes
The Company has unsecured senior notes of $1.0 billion that were funded in five tranches. The first tranche of $100 million is due in 2027 and has a fixed annual interest rate of 4.09%. The second tranche of $250 million is due in 2025 and has a fixed annual interest rate of 3.91%. The third tranche of $125 million is due in 2027 and has a fixed annual interest rate of 3.78%. The fourth tranche of $250 million is due in 2028 and has a fixed annual interest rate of 3.86%. The fifth tranche of $275 million is due in 2029 and has a fixed annual interest rate of 3.95%.
The unsecured senior notes contain financial covenants that are consistent with those of our Credit Facility, with the exception of a secured leverage ratio of no more than 40%. The senior notes also contain customary representations and warranties and affirmative and negative covenants, as well as customary events of default.
Secured Mortgage Notes
In December 2022, the Company refinanced mortgages on the Company's two Terminus properties in Atlanta with the existing lender. Under the new mortgages, the maturities were extended from January 2023 to January 2031, the combined principal increased to $221.0 million, and the interest rate is now 6.34%. These mortgages are not cross-collateralized nor cross-defaulted.
In October 2022, the Company paid off, in full, its Legacy Union One and Promenade Tower mortgages.
As of March 31, 2023, the Company had $533.2 million outstanding on five non-recourse mortgage notes. All interest rates on the secured mortgage notes are fixed. Assets with depreciated carrying values of $902.2 million were pledged as security on these mortgage notes payable.
Other Debt Information
The Company is in compliance with all of the covenants related to its unsecured and secured debt.
At March 31, 2023 and December 31, 2022, the estimated fair value of the Company’s notes payable was $2.3 billion and $2.2 billion, respectively, calculated by discounting the debt's remaining contractual cash flows at estimated current market rates at which similar loans could have been obtained at March 31, 2023 and December 31, 2022. The estimate of the current market rates, which is the most significant input in the discounted cash flow calculation, is intended to replicate debt of similar maturity and loan-to-value relationship. These fair value calculations are considered to be Level 2 under the guidelines as set forth in ASC 820, as the Company utilizes market rates for similar type loans from third party brokers.
For the three months ended March 31, 2023 and 2022, interest expense was recorded as follows ($ in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | | | |
| 2023 | | 2022 | | | | | | | | |
| Total interest incurred | $ | 30,121 | | | $ | 18,976 | | | | | | | | | |
| Interest capitalized | (5,091) | | | (3,451) | | | | | | | | | |
| Total interest expense | $ | 25,030 | | | $ | 15,525 | | | | | | | | | |
7. DERIVATIVE FINANCIAL INSTRUMENTS
On September 27, 2022, the Company entered into a floating-to-fixed interest rate swap with respect to the $350 million 2021 Term Loan through the maturity date of August 30, 2024. This swap effectively fixed the underlying SOFR rate at 4.234%.
The Company's objectives in using interest rate derivatives are to add stability to interest expense and to manage is exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. During 2022 and 2023, such derivatives were used to hedge the variable cash flows associated with the 2021 Term Loan (referred to as a "cash flow hedge").
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income and subsequently reclassified into interest expense in the same periods during which the hedged transaction affects earnings.
The counterparty under this swap is a major financial institution, and the swap contains provisions whereby if the Company defaults on certain of its indebtedness, and such default results in repayment of such indebtedness being, or becoming capable of being, accelerated by the lender, then the Company could also be declared in default under the swap. There are no collateral requirements related to this swap.
As of March 31, 2023 and December 31, 2022, the fair value of this swap was $587,000 and $1.8 million, respectively, and are included in other assets on the Company's consolidated balance sheets.
The table below presents the effect of the Company's derivative financial instruments on the consolidated statements of operations for the three months ended March 31, 2023 and 2022 ($ in thousands):
| | | | | | | | | | | |
| Three Months Ended March 31, |
| Cash Flow Hedge: | 2023 | | 2022 |
| Amount of loss recognized in accumulated other comprehensive income on interest rate derivatives | $ | (1,041) | | | $ | — | |
| Amount of loss reclassified from accumulated other comprehensive income into income as interest expense | $ | (189) | | | $ | — | |
| Total amount of interest expense presented in the consolidated statements of operations | $ | 25,030 | | | $ | 15,525 | |
The fair value of this hedge is determined using observable inputs other than quoted prices in active markets, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities. These inputs are considered Level 2 inputs in the fair value hierarchy, and the Company engages a third-party expert to determine these inputs. The fair value of the cash flow hedge is determined using the conventional industry methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts made between the Company and its counterparty to the cash flow hedge. These variable cash receipts are based on the expectation of future interest rates which are derived from observed market interest rate curves. In addition, any credit valuation adjustments are considered in the fair values to account for potential nonperformance risk to the extent they would be significant inputs to the calculation. For the periods presented, credit valuation adjustments were not considered to be significant inputs.
8. OTHER LIABILITIES
Other liabilities on the consolidated balance sheets as of March 31, 2023 and December 31, 2022 included the following ($ in thousands):
| | | | | | | | | | | | | | |
| | 2023 | | 2022 |
| Ground lease liability | | $ | 53,225 | | | $ | 53,129 | |
| Prepaid rent | | 35,262 | | | 33,165 | |
| Security deposits | | 13,709 | | | 14,635 | |
| Restricted stock unit liability | | — | | | 1,048 | |
| Other liabilities | | 1,859 | | | 1,465 | |
| | $ | 104,055 | | | $ | 103,442 | |
9. COMMITMENTS AND CONTINGENCIES
Commitments
The Company had outstanding performance bonds totaling $687,000 at March 31, 2023. As a lessor, the Company had $172.4 million in future obligations under leases to fund tenant improvements and other future construction obligations at March 31, 2023.
Litigation
The Company is subject to various legal proceedings, claims, and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance. Management makes assumptions and estimates concerning the likelihood and amount of any potential loss relating to these matters using the latest information available. The Company records a liability for litigation if an unfavorable outcome is probable and the amount of loss or range of loss can be reasonably estimated. If an unfavorable outcome is probable and a reasonable estimate of the loss is a range, the Company accrues the best estimate within the range. If no amount within the range is a better estimate than any other amount, the Company accrues the minimum amount within the range. If an unfavorable outcome is probable but the amount of the loss cannot be reasonably estimated, the Company discloses the nature of the litigation and indicates that an estimate of the loss or range of loss cannot be made. If an unfavorable outcome is reasonably possible and the estimated loss is material, the Company discloses the nature and estimate of the possible loss of the litigation. The Company does not disclose information with respect to litigation where an unfavorable outcome is considered to be remote or where the estimated loss would not be material. Based on current expectations, such matters, both individually and in the aggregate, are not expected to have a material adverse effect on the liquidity, results of operations, business, or financial condition of the Company.
10. STOCKHOLDERS' EQUITY
In the third quarter of 2021, the Company entered into an Equity Distribution Agreement ("EDA") with six financial institutions known as an at-the-market stock offering program ("ATM Program"), under which the Company may offer and sell shares of its common stock from time to time in "at-the-market" offerings with an aggregate gross sales price of up to $500 million. In connection with the ATM Program, Cousins may, at its discretion, enter into forward equity sale agreements. The use of a forward equity sale agreement ("Forward Sales") would allow the Company to lock in a share price on the sale of shares of its common stock at the time the agreement is executed, but defer receiving the proceeds from the sale of shares until a later date, allowing the Company to better align such funding with its capital needs. Sales of shares of Cousins' stock through its banking relationships, if any, are made in amounts and at times to be determined by Cousins from time to time, but the Company has no obligation to sell any of the shares in the offering and may suspend sales in connection with the offering at any time. Sales of Cousins' common stock under Forward Sales, if undertaken, meet the derivatives and hedging guidance scope exception as the contracts are related to the Company's own stock. On February 17, 2023, the Company filed a Form S-3 to renew the registration of its authorized shares. In conjunction with that Form S-3 filing, the Company entered into an Amendment to the EDA to allow for the continued issuance of shares under this ATM Program.
On June 29, 2022, the Company issued 2.6 million shares of common stock under Forward Sales contracts executed in December 2021 at an average price of $39.92 per share, for gross proceeds of $105.1 million. To date, the Company has issued 2.6 million shares under the ATM Program and has generated cash proceeds of $101.4 million, net of $1.1 million of compensation to be paid with respect to such Forward Sales, $1.7 million of dividends owed during the period the Forward Sales were outstanding, and $900,000 of other transaction related costs. To the extent, prior to settlement, shares sold under Forward Sales were potentially dilutive during the period under the treasury stock method, the impact of such dilution is disclosed in the calculation included in note 13. The Company did not issue any shares under the ATM Program during the quarters ended March 31, 2023 or 2022 and did not have any outstanding Forward Sales contracts for the sale of its common stock as of March 31, 2023.
11. REVENUE RECOGNITION
The Company categorizes its primary sources of revenue into revenue from contracts with customers and other revenue accounted for as leases under ASC 842 as follows:
•Rental property revenues consist of (1) contractual revenues from leases recognized on a straight-line basis over the term of the respective lease; (2) percentage rents recognized once a specified sales target is achieved; (3) parking revenues; (4) termination fees; and (5) the reimbursement of the tenants' share of real estate taxes, insurance, and other operating expenses. The Company's leases typically include renewal options and are classified and accounted for as operating leases. Rental property revenues are accounted for in accordance with the guidance set forth in ASC 842.
•Fee income consists of development fees, management fees, and leasing fees earned from unconsolidated joint ventures and from third parties. Fee income is accounted for in accordance with the guidance set forth in ASC 606.
For the three months ended March 31, 2023, the Company recognized rental property revenues of $200.1 million, of which $59.1 million represented variable rental revenue. For the three months ended March 31, 2022, the Company recognized rental property revenues of $183.2 million, of which $52.8 million represented variable rental revenue.
For the three months ended March 31, 2023, the Company recognized fee and other revenue of $2.7 million. For the three months ended March 31, 2022, the Company recognized fee and other revenue of $3.7 million. The $3.7 million fee and other revenue includes $814,000 of income related to the Company's consulting and development contracts with Norfolk Southern Railway Company, as discussed in note 3 of the notes to consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2022.
As disclosed in an 8-K filed on March 15, 2023, the Company has a lease with SVB Financial Group ("SVB Financial") at its Hayden Ferry property in Phoenix, Arizona. SVB Financial’s primary subsidiary, SVB Bank, was placed in receivership by the Federal Deposit Insurance Corporation ("FDIC") on March 10, 2023. On March 17, 2023, SVB Financial filed a voluntary petition for a court-supervised reorganization under Chapter 11 of the US Bankruptcy Code. On March 27, 2023, First Citizen's BancShares, Inc. ("FCB") announced that it had entered in to an agreement with the FDIC to purchase substantially all of the loans and certain other assets, and to assume all customer deposits and certain other liabilities of Silicon Valley Bridge Bank, N.A. FCB has also indicated that it intends to operate the SVB Bank locations as a division of FCB. SVB Financial is current on the financial obligations of its lease with Cousins through May 2023, and, to date, there has been no rejection of the lease under SVB Financial’s bankruptcy. This lease is projected to generate approximately $700,000 in straight-line revenue, inclusive of parking revenue and reimbursed operating expenses, per month through expiration in January 2026. If, at a date subsequent to the filing of these financial statements, collection under the terms of the lease no longer remains probable, the Company would reserve the net assets associated with the lease at that time. Net assets associated with the lease as of March 31, 2023 were $1.9 million.
12. STOCK-BASED COMPENSATION
The Company has several types of stock-based compensation — stock options, restricted stock, restricted stock units ("RSUs"), and the Employee Stock Purchase Plan ("ESPP").
The Company's compensation expense for the three months ended March 31, 2023 relates to restricted stock and RSUs awarded in 2023, 2022, 2021, and 2020, and the ESPP. Compensation expense for the three months ended March 31, 2022 relates to restricted stock, RSUs awarded in 2022, 2021, 2020, and 2019, and the ESPP. Restricted stock, the 2023 RSUs, 2022 RSUs, 2021 RSUs, and the 2020 RSUs are equity-classified awards (settled in shares of the Company) for which compensation expense per share is fixed. The 2019 RSUs were liability-classified awards (settled in cash) for which the expense fluctuated from period to period dependent, in part, on the Company's stock price. For the three months ended March 31, 2023 and 2022, stock-based compensation expense, net of forfeitures, was recorded as follows ($ in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2023 | | 2022 | | | | |
| Equity-classified awards: | | | | | | | | |
| Restricted stock | | $ | 858 | | | $ | 780 | | | | | |
| Market-based RSUs | | 1,751 | | | 1,212 | | | | | |
| Performance-based RSUs | | 480 | | | 372 | | | | | |
| Director grants | | 385 | | | 332 | | | | | |
| Employee Stock Purchase Plan | | 37 | | | 52 | | | | | |
| Total equity-classified award expense, net of forfeitures | | 3,511 | | | 2,748 | | | | | |
| | | | | | | | |
| Liability-classified awards | | | | | | | | |
| Time-vested RSUs | | 61 | | | 132 | | | | | |
| Dividend equivalent units | | — | | | 15 | | | | | |
| | | | | | | | |
| | | | | | | | |
| Total liability-classified award expense, net of forfeitures | | 61 | | | 147 | | | | | |
| Total stock-based compensation expense, net of forfeitures | | $ | 3,572 | | | $ | 2,895 | | | | | |
Information on the Company's stock compensation plan, including information on the Company's equity-classified and liability-classified awards is discussed in note 15 of the notes to consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2022.
Grants of Equity-Classified Awards
Under the 2019 Plan, in February 2023, the Company granted three types of equity-classified awards to key employees: (1) RSUs based on the Total Stockholder Return ("TSR") of the Company, as defined in the award documents, relative to that of office peers included in the Nareit Office Index (the "Market-based RSUs"), (2) RSUs based on the ratio of cumulative funds from operations per share to targeted cumulative funds from operations per share (the “Performance-based RSUs”), and (3) restricted stock.
The RSU awards are equity-classified awards to be settled in stock with issuance dependent upon the attainment of required service, market, and performance criteria. For the Market-based RSUs the Company expenses an estimate of the fair value of the awards on the grant date, calculated using a Monte Carlo valuation at grant date, ratably over the vesting period, adjusting only for forfeitures when they occur. The expense of these Market-based RSUs is not adjusted for the number of awards that actually vest. For the Performance-based RSUs, the Company expenses the awards over the vesting period using the grant date fair market value of the Company's stock on the grant date. The expense is recognized ratably over the vesting period and adjusted each quarter based on the number of shares expected to vest and for forfeitures when they occur. The performance period for the Performance-based RSUs and TSR measurement period for the Market-based RSUs awarded is three years starting on January 1 of the year of issuance and ending on December 31. The ultimate settlement of these awards can range from zero percent to 200% of the targeted number of units depending on the achievement of the market and performance metrics described above.
On February 6, 2023, the Company made modifications to its Market-based RSU awards granted in 2022, 2021, and 2020. The modifications were made to clarify the definition of the peer group used to measure TSR award achievement and resulted in $247,000 of compensation expense recorded in February 2023 for the change in fair value on the modification date.
The restricted stock vests ratably over three years from the grant date. The Company records restricted stock in common stock and additional paid-in capital at fair value on the grant date, with the offsetting deferred compensation also recorded in additional paid-in capital. The Company records compensation expense over the vesting period.
The following table summarizes the grants of equity-classified awards made by the Company in the first quarter of 2023:
| | | | | |
| Shares and Targeted Units Granted |
| Market-based RSUs | 164,430 | |
| Performance-based RSUs | 70,472 | |
| Restricted stock | 164,221 | |
| |
The Monte Carlo valuation used to determine the grant date fair value of the equity-classified Market-based RSUs included the following assumptions for those RSUs granted in the first quarter of 2023:
| | | | | | | | | | | | |
| | Assumptions for RSUs Granted | | |
| Volatility | (1) | 40.50 | % | | |
| Risk-free rate | (2) | 4.35 | % | | |
| Stock beta | (3) | 1.03 | % | | |
| | | | |
(1) Based on historical volatility over three years using daily stock price.
(2) Reflects the yield on three-year Treasury bonds as reported by the Federal Reserve in the H.15 release.
(3) Betas are calculated with up to three years of daily stock price data.
13. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share for the three months ended March 31, 2023 and 2022 ($ in thousands, except per share amounts):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| | 2023 | | 2022 | | | | |
| Earnings per common share - basic: | | | | | | | |
| Numerator: | | | | | | | |
| Net income | $ | 22,356 | | | $ | 28,163 | | | | | |
Net income attributable to noncontrolling interests in CPLP from continuing operations | (4) | | | (6) | | | | | |
| Net income attributable to other noncontrolling interests | (156) | | | (173) | | | | | |
| Net income available to common stockholders | $ | 22,196 | | | $ | 27,984 | | | | | |
| | | | | | | |
| Denominator: | | | | | | | |
| Weighted average common shares - basic | 151,579 | | | 148,739 | | | | | |
| | | | | | | |
| | | | | | | |
| Net income per common share - basic | $ | 0.15 | | | $ | 0.19 | | | | | |
| | | | | | | |
| Earnings per common share - diluted: | | | | | | | |
| Numerator: | | | | | | | |
| Net income | $ | 22,356 | | | $ | 28,163 | | | | | |
| Net income attributable to other noncontrolling interests | (156) | | | (173) | | | | | |
| Net income available for common stockholders before allocation of net income attributable to noncontrolling interests in CPLP | $ | 22,200 | | | $ | 27,990 | | | | | |
| | | | | | | |
| Denominator: | | | | | | | |
| Weighted average common shares - basic | 151,579 | | | 148,739 | | | | | |
| Add: | | | | | | | |
| | | | | | | |
Potential dilutive common shares - restricted stock units, less shares assumed purchased at market price | 276 | | | 238 | | | | | |
Weighted average units of CPLP convertible into common shares | 25 | | | 25 | | | | | |
| Weighted average common shares - diluted | 151,880 | | | 149,002 | | | | | |
| | | | | | | |
| | | | | | | |
| Net income per common share - diluted | $ | 0.15 | | | $ | 0.19 | | | | | |
| | | | | | | |
| | | | | | | |
The treasury stock method resulted in no dilution from shares expected to be issued under the ESPP or forward contracts for the future sales of common stock under the Company's ATM Program during the respective periods presented.
14. CONSOLIDATED STATEMENTS OF CASH FLOWS - SUPPLEMENTAL INFORMATION
Supplemental information related to the cash flows, including significant non-cash activity affecting the consolidated statements of cash flows, for the three months ended March 31, 2023 and 2022 is as follows ($ in thousands):
| | | | | | | | | | | |
| 2023 | | 2022 |
| Interest paid | $ | 33,219 | | | $ | 24,179 | |
| Income taxes paid | — | | | — | |
| Non-Cash Activity: | | | |
| | | |
| | | |
| | | |
| Common stock dividends declared and accrued | 48,600 | | | 48,597 | |
| Tenant improvements recorded in deferred income | 26,943 | | | 1,857 | |
| | | |
| | | |
| | | |
|
| | | |
| | | |
The following table provides a reconciliation of cash and cash equivalents recorded on the consolidated balance sheets to cash, cash equivalents, and restricted cash in the consolidated statements of cash flows ($ in thousands):
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Cash and cash equivalents | $ | 3,585 | | | $ | 5,145 | |
| | | |
| | | |
15. REPORTABLE SEGMENTS
The Company's segments are based on the method of internal reporting, which classifies operations by property type and geographical region. The segments by property type are Office and Non-Office. The segments by geographical region are Atlanta, Austin, Charlotte, Dallas, Phoenix, Tampa, and other markets. Included in other markets are properties located in Chapel Hill (sold in September 2022), Houston, and Nashville. Included in Non-Office are retail and apartments in Chapel Hill (sold in September 2022) and Atlanta, as well as the College Street Garage in Charlotte. These reportable segments represent an aggregation of operating segments reported to the Chief Operating Decision Maker based on similar economic characteristics that include the type of property and the geographical location. Each segment includes both consolidated operations and the Company's share of joint venture operations.
Company management evaluates the performance of its reportable segments based in part on net operating income (“NOI”). NOI represents rental property revenues, less termination fees, less rental property operating expenses. NOI is not a measure of cash flows or operating results as measured by GAAP, is not indicative of cash available to fund cash needs, and should not be considered an alternative to cash flows as a measure of liquidity. All companies may not calculate NOI in the same manner. The Company considers NOI to be an appropriate supplemental measure to net income as it helps both management and investors understand the core operations of the Company's operating assets. NOI excludes fee income, other revenue, corporate general and administrative expenses, reimbursed expenses, interest expense, depreciation and amortization, impairments, gains/losses on sales of real estate, gains/losses on extinguishment of debt, transaction costs, and other non-operating items.
Segment net income, amount of capital expenditures, and total assets are not presented in the following tables because management does not utilize these measures when analyzing its segments or when making resource allocation decisions. Information on the Company's segments along with a reconciliation of NOI to net income for the three months ended March 31, 2023 and 2022 are as follows ($ in thousands):
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 | | Office | | Non-Office | | Total |
| Revenues: | | | | | | |
| Atlanta | | $ | 72,132 | | | $ | 457 | | | $ | 72,589 | |
| Austin | | 67,883 | | | — | | | 67,883 | |
| Charlotte | | 14,818 | | | 1,761 | | | 16,579 | |
| Dallas | | 4,187 | | | — | | | 4,187 | |
| Phoenix | | 15,583 | | | — | | | 15,583 | |
| Tampa | | 18,748 | | | — | | | 18,748 | |
| Other markets | | 6,623 | | | — | | | 6,623 | |
| Total segment revenues | | 199,974 | | | 2,218 | | | 202,192 | |
| Less: Company's share of rental property revenues from unconsolidated joint ventures | | (1,659) | | | (457) | | | (2,116) | |
| Total rental property revenues | | $ | 198,315 | | | $ | 1,761 | | | $ | 200,076 | |
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2022 | | Office | | Non-Office | | Total |
| Revenues: | | | | | | |
| Atlanta | | $ | 68,014 | | | $ | 423 | | | $ | 68,437 | |
| Austin | | 61,224 | | | — | | | 61,224 | |
| Charlotte | | 13,503 | | | 985 | | | 14,488 | |
| Dallas | | 4,196 | | | — | | | 4,196 | |
| Phoenix | | 13,430 | | | — | | | 13,430 | |
| Tampa | | 16,924 | | | — | | | 16,924 | |
| Other markets | | 7,328 | | | 1,358 | | | 8,686 | |
| Total segment revenues | | 184,619 | | | 2,766 | | | 187,385 | |
| Less: Company's share of rental property revenues from unconsolidated joint ventures | | (2,377) | | | (1,781) | | | (4,158) | |
| Total rental property revenues | | $ | 182,242 | | | $ | 985 | | | $ | 183,227 | |
NOI by reportable segment for the three months ended March 31, 2023 and 2022 are as follows ($ in thousands):
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 | | Office | | Non-Office | | Total |
| Net Operating Income: | | | | | | |
| Atlanta | | $ | 47,389 | | | $ | 270 | | | $ | 47,659 | |
| Austin | | 40,273 | | | — | | | 40,273 | |
| Charlotte | | 10,762 | | | 1,162 | | | 11,924 | |
| Dallas | | 3,225 | | | — | | | 3,225 | |
| Phoenix | | 11,773 | | | — | | | 11,773 | |
| Tampa | | 11,711 | | | — | | | 11,711 | |
| Other markets | | 3,571 | | | — | | | 3,571 | |
| Total Net Operating Income | | $ | 128,704 | | | $ | 1,432 | | | $ | 130,136 | |
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2022 | | Office | | Non-Office | | Total |
| Net Operating Income: | | | | | | |
| Atlanta | | $ | 44,173 | | | $ | 235 | | | $ | 44,408 | |
| Austin | | 36,367 | | | — | | | 36,367 | |
| Charlotte | | 10,011 | | | 643 | | | 10,654 | |
| Dallas | | 3,308 | | | — | | | 3,308 | |
| Phoenix | | 8,975 | | | — | | | 8,975 | |
| Tampa | | 10,691 | | | — | | | 10,691 | |
| Other markets | | 4,295 | | | 909 | | | 5,204 | |
| Total Net Operating Income | | $ | 117,820 | | | $ | 1,787 | | | $ | 119,607 | |
The following reconciles Net Operating Income from net income for each of the periods presented ($ in thousands):
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| | 2023 | | 2022 | | | | |
| Net Income | $ | 22,356 | | | $ | 28,163 | | | | | |
| Net operating income from unconsolidated joint ventures | 1,409 | | | 2,719 | | | | | |
| Fee income | (374) | | | (1,388) | | | | | |
| Termination fee income | (136) | | | (1,462) | | | | | |
| Other income | (2,278) | | | (2,283) | | | | | |
| Reimbursed expenses | 207 | | | 360 | | | | | |
| General and administrative expenses | 8,438 | | | 8,063 | | | | | |
| Interest expense | 25,030 | | | 15,525 | | | | | |
| Depreciation and amortization | 75,770 | | | 70,744 | | | | | |
| | | | | | | |
| Other expenses | 385 | | | 221 | | | | | |
| Income from unconsolidated joint ventures | (673) | | | (1,124) | | | | | |
| | | | | | | |
| Loss on investment property transactions | 2 | | | 69 | | | | | |
| | | | | | | |
| Net Operating Income | $ | 130,136 | | | $ | 119,607 | | | | | |
